Most people think private equity means big buyout funds with institutional LPs. They're half right. The other half of the story is family offices — and they're reshaping how deals get done in the lower middle market.
According to the Citi Private Bank Global Family Office Survey 2024, 77% of family offices in North America are now engaged in direct private equity investments. That's not a fringe activity. That's the majority of a capital class that controls trillions of dollars sitting across thousands of private investment offices in the United States.
If you're a business owner thinking about selling, or an operator trying to understand who's buying lower middle market companies right now, you need to understand how family offices work. They're different from PE funds in ways that matter a great deal.
What a family office actually is
A family office is a private wealth management structure set up by a high-net-worth family to manage its investments, taxes, estate planning, and operations. Single-family offices serve one family. Multi-family offices pool resources across several families.
They don't raise funds from outside LPs. They don't have a mandate to return capital in seven to ten years. They invest their own money, on their own timeline, with their own priorities. That structural difference changes everything about how they behave as buyers.
Family offices exist because someone built a significant business and needed a professional structure to manage the proceeds. That origin shapes their investment instincts. They understand operations. They understand P&L. They know what it means to run a business, not just own one on paper.
How they allocate to private equity
The average family office portfolio splits PE exposure roughly 8% in direct investments and 10% in PE funds and funds of funds, per the Citi survey. That's not a small allocation. On a $500 million family office, that's $90 million sitting in private equity across fund commitments and direct deals.
The mix between direct and fund commitments varies by size. Larger family offices with over $1 billion under management tend to favor funds because managing a large capital pool doesn't automatically come with the deal sourcing infrastructure needed for direct investing, according to Deloitte's Family Office Insights Series. Smaller family offices often go the other direction. They have operator-founders who want to stay close to the deal and extract value through direct involvement.
What's consistent across size categories is appetite. The Citi survey found that 39% of family offices plan to increase their private equity allocations in the coming year. Deal volume may be down from its 2021 peak, but the capital intent is still there.
Direct deals vs. fund commitments
Fund commitments are simpler. A family office writes a check to a PE fund, pays a management fee, waits for capital calls, and collects distributions on whatever timeline the fund manager sets. The family office gets diversification and professional deal management. It gives up control, customization, and some net return in exchange for fees and carry.
Direct deals are more complex and potentially more rewarding. A family office sources a deal, structures it directly with the seller, and runs the investment without a fund manager in between. Research by Fang, Ivashina, and Lerner published through SSRN found that solo direct investments by family offices delivered a 22% IRR over the period 1991 to 2010, outperforming various fund benchmarks by nearly 6.8 percentage points. Past performance doesn't guarantee future results, but the structural logic is sound: when you cut out the fee layer, more return flows to the investor.
The catch is execution. Only about half of family offices making direct investments have trained private equity professionals on staff, according to research cited by Wharton. And only 20% of family offices that invest directly take board seats in their portfolio companies. Without governance infrastructure, the theoretical return premium gets eaten by execution risk.
The lower middle market: family office territory
Here's the data point that matters most for operators in the $2 million to $10 million EBITDA range. According to CapitalPad's 2025 analysis of closed lower middle market transactions, family offices averaged $12.4 million in enterprise value per deal. That's higher than traditional PE funds ($9.5 million) and independent sponsors ($8 million and change).
Family offices are not priced out of the lower middle market. They're buying there deliberately. The reason is straightforward: lower middle market businesses offer better multiples relative to deal complexity than the upper market, and family offices have the patience and operator mindset to extract value that pure financial buyers can't.
For a business owner considering an exit, a family office buyer offers something institutional PE often doesn't: alignment. They're not managing to a fund cycle. They're not under pressure to flip in three to five years to generate a vintage return. They can hold indefinitely, reinvest in the business, and operate at whatever pace creates long-term value.
Club deals and co-investments
Not every family office wants to lead a deal solo. About 60% prefer club deals, per PwC's Global Family Office Deals Study. A club deal brings together two or more family offices or a family office alongside a PE fund, sharing diligence, governance, and capital exposure.
This model makes sense. It pools deal sourcing networks. It distributes operational oversight across multiple parties. It reduces concentration risk for any single family office. And it allows smaller family offices to participate in deals larger than they could fund independently.
Co-investing alongside PE funds is the other common structure. A PE fund sources and leads a deal, then offers a co-investment right to family offices in its LP base. The family office invests directly in the deal alongside the fund, often at reduced or zero fees. The fund gets additional committed capital. The family office gets direct exposure with the benefit of the fund's diligence infrastructure.
What this means for sellers and operators
If you're preparing a business for sale, the family office buyer deserves more attention than it typically gets. They move differently than institutional PE. They're often more patient on diligence, more willing to structure seller notes and earnouts in ways that work for both sides, and less likely to gut the management team in year one.
The evaluation criteria are also different. A family office built by a manufacturing operator is going to read a manufacturing company's P&L differently than a generalist PE fund. They bring domain knowledge to the table. That can accelerate trust on both sides of a transaction.
The flip side: family offices can be slower. They don't have deal committees running on the same rhythm as institutionalized PE. A partner at a PE fund has a job that lives or dies by deal volume. A family office principal has broader responsibilities. Getting to a signed LOI can take longer than sellers expect.
For an overview of what lower middle market buyers look for across deal types, see our guide to what private equity firms look for in acquisitions.
The veteran operator angle
At Patriot Growth Capital, we pay attention to how family offices operate because they represent one of the most aligned capital models in the lower middle market. The structural characteristics that define a family office (patient capital, operator sensibility, long-term orientation) overlap significantly with how veteran-led businesses think about growth and ownership.
Veterans don't optimize for a five-year exit. They build systems, develop people, and run operations over the long arc. That's not a PE fund model. That's closer to how a well-run family office thinks about portfolio companies. The alignment isn't accidental.
The rise of family office activity in the lower middle market also signals something important: the capital pool available to founder-owned businesses is wider than it's ever been. You're not limited to choosing between a bank loan and a traditional PE buyout. Family offices, independent sponsors, and hybrid structures like PGC's Acquire, Mentor, Invest model are all competing for well-run businesses in the $2 million to $10 million EBITDA range.
Know your buyers. Understand how their capital is structured. A seller who understands the difference between a family office and a traditional PE fund enters negotiation with a real advantage.
Frequently Asked Questions
How do family offices differ from private equity funds in lower middle market deals?
Family offices invest their own permanent capital with no mandatory exit timeline, while PE funds manage pooled LP capital and typically exit within five to seven years. This structural difference makes family offices more flexible on hold periods and deal structure, particularly for sellers who want continuity after a transaction.
What percentage of family offices invest directly in private equity?
According to the Citi Private Bank Global Family Office Survey 2024, 77% of North American family offices engage in direct private equity investments. The average portfolio allocation is approximately 8% in direct deals and 10% in PE funds and funds of funds.
What is a club deal in family office private equity investing?
A club deal involves two or more investors, often multiple family offices, co-investing in a single transaction under pre-negotiated terms. About 60% of family offices prefer club deals because they share diligence costs, governance responsibilities, and capital exposure, allowing participation in deals larger than any single office could fund alone.
Are family offices active in the lower middle market?
Yes. CapitalPad's 2025 analysis of closed lower middle market transactions shows family offices averaged $12.4 million in enterprise value per deal, which is higher than traditional PE funds ($9.5 million) and independent sponsors. Family offices are deliberate lower middle market participants, not capital of last resort.
